Practically all commercial drug development is driven by patents. Unfortunately, this business model assumes a multi-billion dollar market which often doesn’t exist. This is almost always true for developing-world diseases like malaria and dengue fever. Here, patients are so poor that even millions of sufferers don’t add up to a useful market. But inadequate market size is also surprisingly common in rich nations. Probably the most famous example involves orphan diseases that “only” affect a few thousand patients — a category that happens to include most cancers. More generally, rich nation markets repeatedly undervalue goods which (a) have externalities, so that consumers only receive a small part of the product’s overall benefit to society, and (b) are too important to fail, so that consumers calculate that government will eventually supply them gratis. Together, these market imperfections go a long way toward explaining why US companies invest so little in vaccine R&D.
For many diseases, then, patents are not an option. But if patents won’t work, then what? Recent years have seen several high-profile initiatives to fill the gap. The first – and easily the largest – was Congress’s $5.6 billion “Bioshield” program (Public Law 108-276) to promote the private development of drugs and vaccines to fight off a bioweapons attack. Five years on, the program hasn’t delivered a single new product. Bioshield’s defenders like to argue that drug discovery is expensive – about $800 million per drug. By that standard, though, the program’s $5.6 billion budget should funded seven new drugs. The real problem, as critics have repeatedly pointed out, is that Bioshield got the incentives wrong. “Wait for industry to invent a new drug,” Congress told DHS, “and then pay them a reasonable price to make it.” Companies, though, were skeptical. To them the Bioshield law sounded more like an invitation to spend $800 million and then trust the government to set a “fair price.” Not surprisingly, they stayed away in droves. Evidently, just offering money isn’t enough. You also have to get the incentives right too. Read the rest of this entry »